Corporate reforms strengthen the investment case for Japan: Five funds to consider to get exposure in your portfolio

Japan has been hitting the headlines this week over hopes of improved relations with its larger neighbour China, prompted it seems by a shared interest in countering Donald Trump's trade policies.

Its ability to keep trading relatively freely with America is obviously very important, but domestic matters may be more significant from an investment perspective.

I don't personally invest in Japanese equities at the moment, principally for the long standing and well known reasons: the economy has been stuck in slow motion for decades and its companies tend to be run in a highly conservative, unaccountable manner with too little regard for shareholders' interests.

Japanese Prime Minister Shinzo Abe right shakes hands with Chinese President Xi Jinping during a meeting in Russia this week.

While in the West, it is overspending facilitated by easy credit that signals economic danger, in Japan the reverse is the case.

Both in terms of consumers' personal spending and corporate spending, the Japanese lean too heavily on the side of caution and elect to hoard their cash.

I might pick up some Japanese equities investments soon though, for one reason in particular.

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The strong inclination to tuck money away rather than spend is not shifting hugely at the individual level by most reckonings, but there is change emerging within the nation's corporations which should significantly improve returns for shareholders over the long run.

The long called-for 'corporate governance reforms' are creaking into life and this is bearing fruit.

Corporate governance refers to how the senior management run a company. What they prioritise, how they manage various competing interests, and most importantly what they do with the money the company makes.

Corporate governance encompasses a vast range of things but as a shareholder one the most important of these is how much of the profit it dishes out to shareholders through dividends or stock buy-backs. There's good news on this front.

The numbers in this chart produced by Kepler Partners speak for themselves.

This chart produced by Kepler Partners illustrates the strong rise in cash being returned to holders of Japanese stocks.

One thing you can be pretty sure of as a shareholder in Japanese companies is that the staff are working hard. The Japanese work ethic is famously strong, perhaps to a fault.

So much so, that the Japanese have invented a word for somebody working themselves to death - Karōshi.

In all seriousness, this approach cannot actually be good for investors ultimately, given the multitude of studies which show people perform better in their jobs if they are healthy, happy and have some work/life balance.

There are other downside risks of course, principally around the aforementioned danger that Trump could turn his ire, so far aimed principally at China, on Japan.

The arguments made about an artificially weakened currency and undercutting America's homegrown companies could also be applied to Japan if deemed politically expedient.

The long called for 'corporate governance reforms' are creaking into life here in Tokyo and across the rest of Japan.

Should you wish to tap into Japan's stock market it is not wise to try and pick a handful of winners at the single stock level however.

Picking winning stocks even in your home market where you have a lot of familiarity with the companies is very tricky, so doing so in Japan would not be far off buying a lottery ticket.

Fortunately there is no shortage of options in terms of Japanese equities funds. You could go with the low fee option of a passive Japanese stock market tracker available through the usual platforms, and that will give you straightforward exposure to the entire asset class.

If you'd like professionals to pick and choose which stocks to invest in on your behalf there good options on both the open end fund and investment trust side.

Japanese equities fund picks

Adrian Lowcock, head of personal investing at Willis Owen picks out some good open-ended funds:

Man GLG Japan Core Alpha - 'Stephen Harker is a contrarian investor, actively looking for companies out of favour with investors. He uses valuations measures including Price to Book, Dividend Yield and Price Earnings ratio to indentify such stocks. He selects companies with strong fundamentals where he believes there is the opportunity for a turnaround.'

Baillie Gifford Japanese - 'The focus of this fund is very much long term growth which can result in short term underperformance and volatility in the fund. The manager Matthew Brett looks at a company’s fundamentals, in particular a sustainable high return on capital. They are looking for companies with steady growth, special situations, cyclical stocks and secular themes. The fund has exposure to cyclical industrials and car manufacturers and technology.'

Schroder Tokyo – 'Andrew Rose has run Japanese funds since the 1980’s so has significant experience in this market. He likes companies that he believes have the potential to surprise on the upside over a two- to three-year period but where the market has taken a short-term negative view. Rose also has good awareness of macro trends and market behaviour, which is a strong complement to his bottom-up stock-picking. The portfolio is unconstrained although he will not take active positions above 4% relative to the market.'

'This trend is a boon to JP Morgan Japanese Investment Trust, which targets growth companies with strong quality characteristics such as high and rising ROE. The trust aims to generate capital growth by identifying stocks with secular growth characteristics and holding them for the long term. Nicholas Weindling focuses on companies benefiting from the secular changes in Japan’s society and economy, including demographics and corporate governance reform.'

'CC Japan Income & Growth is taking advantage of this dynamic. The trust was launched in December 2015 as the manager, Richard Ashton, believed that the stage was set for a revolution in how Japanese companies view dividends. The trust buys companies with growing dividends, which have either have a track record of growing their pay outs or are facing a catalyst that Richard believes will lead to a distribution or a change in policy.'